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"My position is that there is room for both in a portfolio. This argument has become one of mutual exclusivity, meaning that one is better than the other and that they should not coexist. To use the baseball analogy, why don't you just put 9 second basemen on the field who will bat .275 year in, year out? Of course, every team needs a Mark McGuire or a Babe Ruth who can be counted on to provide heroics (i.e. VanKampen Emerging Growth's 103% return in 1999 or Franklin's Balance Sheet Small Cap which has consistently outperformed the S&P with 1/3 of the risk).

Right, so which ones are you going to pick? Over the long run an index fund will beat most managed funds and the longer the time period then the more of them it will beat (well over 90% for a 30 year time frame). So you might say, "ok, I'll take one of those 3-5% that beat the index fund". The big question is which ones will they be? Nobody knows in advance and it is unlikely anybody will know until after the fact as the number of managed funds that will beat the index fund are pretty much what would be expected by random chance. Read up at - www.indexfunds.com

Every investor should make an intelligent decision regarding his planning after weighing all of the facts. As an aside, the Motley Fool folks also say to remain heavily weighted in technology without any exposure to bonds. The average managed bond mutual fund beat the S&P last year, as well as this year, not to mention the technology returns. Be careful what you read because your source is paid by the advertising that is done in the media. Understand asset allocation and diversify your portfolio using both index and managed funds. Don't allow returns alone to guide your decision."

He's got a good point here. The Fool does encourage 100% stock investing which I think is small 'f' foolish. You need to mix up your asset classes to even out your returns and bring a higher chance of good returns. This doesn't mean getting out of index funds but holding different kinds of index funds - maybe an S&P500 with an index bond fund and an international index fund.

He's also right that you shouldn't let the returns guide your decisions what you also need to look at are the costs. A managed fund will have a cost 3 to 15 times that of an index fund (.6%-3% fees versus .2%). You should read up some at - www.efficientfrontier.com

Hyperborea
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